Why M&A?
We often hear about M&A, which receives a lot of attention from college students. Here are some reasons why companies want to acquire or merge with another company :)
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Economies of scale: Reduce production costs (combine overlapping resources).
Economies of scope: Expand by sharing distribution, marketing space.
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Less competition → More power over customers/ suppliers.
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Taxes (Tax inversions / Tax shields)
Debt! (Lower cost of capital)
Acquiring the target's cash flow → can qualify for more debt.
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Success in eliminating the target's inefficiencies can be unpredictable.
Hostile takeovers tend to have a much lower success rate than friendly takeovers.
For example, Carl Icahn is known for aggressive tactics like cutting salaries and benefits, which may not always lead to successful outcomes.
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Investing in a target with a positive NPV (Net Present Value) can be worthwhile if the acquirer has operational expertise.
Consider if dividends or stock repurchases might be a more effective use of cash.
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Investors can diversify their portfolios on their own, so a public company shouldn't pursue M&A just for diversification.
Different divisions within a conglomerate may compete for resources (fundings), leading to inefficiencies and conflicts.
For examples, P&G's businesses are mostly within the same consumer goods sector, with similar distribution and manufacturing processes, making diversification less necessary.
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Empire building (Bigger is better… or is it?).
Managerial ego from selfish execs.
CEO compensation (often tied to size of firm).
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More purchasing power with suppliers.
Combined distribution.
More powerful rival to Kroger.
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Guaranteeing product quality and procurement.
Expanding access to better distribution.
